Local, Global, and International CAPM: For Which Countries Does Model Choice Matter?

Volume 18, No. 2, 2020

Demissew Ejara, Alain Krapl, Thomas J. O’Brien and Santiago Ruiz de Vargas

For individual stocks of 46 countries, this study investigates empirical differences in discount rate estimates between three risk–return models of interest to practitioners who perform discounted cash-flow valuation analysis: (1) the traditional (local) CAPM; (2) the global CAPM (GCAPM), where the only risk factor is the global market index; and (3) an international CAPM (ICAPM) with two risk factors, the global market index and a wealth-weighted foreign currency index. The study finds that model choice makes a substantial difference for many, but not all, countries.